Last night, I was reading some financial news on my iPhone when I came across an article on CNBC - "Start retirement plans ... NOW! (dated 28 Aug 2014)". The headline caught my attention. However, the excuses for putting off retirement planning at the end of the article are what I would like to highlight.

So here are some popular excuses (used by the Americans) for putting off their retirement planning: 

1. "I am just too busy."

2. "It's too soon to think about retirement."

3. "I waited too long, so it's too late for me to put enough money away."

4. "I can't do it now, because my finances are a mess."

5. "I don't have enough money to start planning for retirement - but my kids will take care of me."

6. "What's the different? My plan is to work until i drop dead, anyway."

The Americans seem to have pretty much the same excuses. Thinking that you are still far from retirement is definitely a valid excuse.  I used it, especially in my early 20s. Naive thinking. 10 years have passed so quickly. Filial piety is considered a key virtue in Asian culture. I believe your kids will definitely (hopefully) take care of you as you age. But they probably would not be able to provide you an income that you were earning prior to your retirement or an income to sustain your lifestyle. Anyway, I wonder what are the other excuses that will be used by Singaporeans.

For satirical purpose, let me propose a few Singaporean excuses:

1. "No need plan la. Government will take care of me!"

2. "I got CPF. I got HDB (housing). More than enough."

3. "I don't know how leh..."

For most of us, excuses will just derail any retirement plans you intended to have. For these people, my advise is to start early. There will always be temptation to buy an expensive continental car (even with our super high COE; even though cars in Singapore are the most expensive in the world); go on an European vacation or multiple vacations to Bangkok; or indulging on our favourite hobby - Shopping. Yes, we have to indulge at times after working so hard. But do it with your retirement plan at the back of your mind. 

Let us not be excessive in our spending (splurging on unnecessary items) or saving (save like scrooge). A balance approach is always better. 

Buying an Exchanged Traded Fund (ETF) is just like buying any stock in the Stock Exchange. As such, there is a capital gain when the prices of the ETF rises above the purchased price. Some ETFs, like the SPDR® Straits Times Index (STI) ETF (ES3) and NIKKO AM Singapore STI ETF (G3B), also pay dividends. Again, I will use the STI ETF to explain how good an investment it is.

So how good an investment is an STI ETF?

In my previous post, Exchange Traded Funds - Simplified, I highlighted that the ETF's objective is to mimic a specific Index:

"If the STI has a bull run and rises to 4,000 points, both mentioned ETFs will be traded at approximately SS$4,00. Likewise, if the STI has a bad run and drops to 2,000 points, both mentioned ETFs will be traded at approximately S$2.00."

Performance of STI ETF simply relates to Straits Times Index

As such, the returns of the STI ETF will definitely be similar to the STI. According to an article in Motley Fool, the STI, over the 10 year period ending February 2014, has generated a 64.7% price return without dividends. 

"Over the ten year period ending February 2014, the STI generated a 64.7% price return without dividends. This meant that before dividends the annualized price return of the Index over the 10 year period was 5.1%.

..., the SPDR® STI ETF has been available to investors since 2002. Without out dividends, over the ten years ending Feb 2014 the SPDR® STI ETF gained 63.9% in Net Asset Value. Including dividends, the 10 year return came to 123.56%. This meant that over the past 10 years, with dividends included, the SPDR® STI ETF returned 8.4% on an annualized basis."

Performance of SPDR® STI ETF and NIKKO AM Singapore STI ETF

Based on factsheets (below) of both SPDR® STI ETF and NIKKO AM Singapore STI ETF, the returns ranges from 7-9% over a period of 5 years.

These are all just historic returns. So what will be the return of STI in 2015? I will not know and I believe no Investment Analyst will be accurate as well. But what about the return of STI in the next 10/20 years? I can safely say it would probably be ranging from 7-9% over the long term.

The Best Time to Buy an STI ETF?

Prior to 2010, STI was trading below 2,600 points. In 2011, the STI traded above 3,200 points before falling back to 2,600 points. 

If you have bought 10 lots of SPDR® STI ETF at $2.60+ (when STI was trading at around 2,600 points), you would have invested about S$26,000. At this current point, your investment will be around S$34,000. That is a 30% profit over a span of 3-5 years depending time of purchase. That easy? No! 

Looking at historic data, it is always easy to predict when you should have invested. So should you invest in the STI ETF now? Over the long term (10-30 year period), the STI has always trend higher over time. From this perspective, if you adopt a Buy-and-Hold-Forever approach, you should be able to achieve long-term returns. However, at current level of the STI, I am not sure if it will go higher in the short term. There might be uncertainties and you might have to sit on unrealized losses for months or years during bad periods. I would rather recommend a Dollar-Cost-Averaging (DCA) approach that I personally feel is safer. The DCA approach involves buying a fixed dollar amount of STI ETF at regular interval (monthly, quarterly, annually etc) regardless of price.

I believe there is no best time to buy the STI ETF. Just Buy, and Keep Buying, and Keep Buying and Hold for a long period of time.

Read: Exchange Traded Funds - Simplified

What exactly is an Exchange Traded Fund (ETF)? 

According to Investopedia's definition, an ETF is a security that tracks an index, a commodity or a basket of assets like an index fund but trades like a stock on an exchange.

To simplify:

1. ETFs are basically mutual funds that trade like stocks on an stock exchange.

2. ETF tracks a particular index. There are ETFs that track Singapore or Foreign stock/bond indexes.

3. Unlike mutual funds, which are priced only once at the close of business by the fund company based on the value of the securities owned by the fund, ETFs are priced continuously throughout the day.

Still do not understand? I will use a Singapore Index ETF as an example to explain.

People are more familiar and often see the Straits Times Index (STI) being reported on the news. The STI shows the performance of the Singapore stock market. As I am writing, the STI is up 0.36% and is at approximately 3334 points (see left). The STI comprises the top 30 stocks listed on the Singapore Stock Exchanged (ranked by market capitalization) as shown below:

There are two ETFs that track the STI in the Singapore Stock Exchange - SPDR® STI ETF (ES3) and NIKKO AM Singapore STI ETF (G3B). The SPDR® STI ETF has been listed since April 2002 and the NIKKO AM Singapore STI ETF has been listed since February 2009.

The STI is currently trading at approximately 3,334 points and the respectively ETF is trading at S$3.37 (SPDR® STI ETF - https://sg.finance.yahoo.com/q?s=ES3.SI - dated 27 Aug 2014) and S$3.42 (NIKKO AM Singapore STI ETF - https://sg.finance.yahoo.com/q?s=G3B.SI&ql=0 - dated 27 Aug 2014). 

SPDR® STI ETF and NIKKO AM Singapore STI ETF are Designed to Mimic the STI

These mentioned ETFs are designed to mimic the STI. If the STI has a bull run and rises to 4,000 points, both mentioned ETFs will be traded at approximately S$4.00. Likewise, if the STI has a bad run and drops to 2,000 points, both mentioned ETFs will be traded at approximately S$2.00.

Why the discrepancy in price between the mentioned ETFs?

In all ETFs, there is always a tracking error. A tracking error tells us how much an ETF would deviate from the index's performance. A high tracking error may result in an erosion of index's gain by the ETF.

Owning an STI ETF is like owning 30 Different Stocks

By owning units of an ETF that tracks the STI, you are basically owning 30 different stocks as mentioned above. On top of getting the diversification, you are able to purchase as little as one lot to gain exposure to the Singapore market. You gain the same exposure without having to spend more money buying the component stock of the STI. Can you imagine owning just one lot of every stock in the STI? S$17,950 for just one lot of DBS shares. 

But with ETFs... 

The two ETFs have different board sizes - 1,000 shares for SPDR® STI ETF and 100 shares for NIKKO AM Singapore STI ETF. At the current price of S$3.37, the minimum investment in SPDR® STI ETF will be S$3,370. At the current price of S$3.42, the minimum investment in the NIKKO AM Singapore STI ETF will be S$342. Both the minimum investment excludes the broker commission and transaction fee.

To Summarize...

1. There are various ETFs - different types of ETF that tracks Stock or Bond or Commodity Index. 

2. ETF's objective is to mimic a specific Index.

3. ETFs are traded on a stock exchange, you can buy and sell units of ETFs throughout the trading day.

I came across an interesting article from Dr Wealth website today. Dr Wealth (http://www.drwealth.com/) is an online platform managed by a team that provides financial advisory ranging from personal finance, insurance, retirement to investment education. 

The article (How Much Returns Do You Really Get From CPF Life? The Truth About CPF Life Premiums - dated 25 Aug 2014) articulates the returns from CPF Life hovers around 1.3% to about 2.5% between the age of 60 and 80. This is lower than than the CPF Retirement Account rate of 4%. Based on their calculation and estimate, the premiums we pay for CPF Life significantly reduces returns by approximately 2%. Dr Wealth further explained that based on their model, the CPF Retirement Account reaches zero by about age of 77, and that is when the returns from CPF Life go up dramatically. In short, the longer you live, the higher the returns from CPF Life (duh!). Another interesting conclusion pointed out in the article was that you have to wait until about 90 years old before the compounded annual returns reach 4%. 

Is CPF Life good then?

This is an interesting take about CPF Life based from an investment returns' perspective. From an investment return point of view, the premiums are "force eating" into the returns which makes it less attractive. From a retiree's - that needs a monthly income to sustain - perspective, CPF Life is probably a good idea. A retiree is probably not interested in the CPF returns, especially when there is no opting out from CPF Life. He just want his monthly payout.

So should you pledge your property and half the Minimum Sum?

The current Minimum Sum is S$155,000. By pledging your property, you will only need half the Minimum Sum (S$77,500) in cash held in CPF. This will half your monthly payout to approximately S$600. So, again, from an investment return point of view, it is probably a good idea to pledge your property as advised by Dr Wealth. This will reduce the CPF Life quantum by half. However, at age 60+, how risk adverse are you? With S$77,500 in your hands, are you willing to get a higher return investment? If you have never started investing before, what are the chances that the money will just be deposited in the bank?

With No Plans, pledging your property will be worst than the Old Minimum Sum Scheme!

So pledging your property is an individual call and it is based on many individual factors. With no plans in mind, it will be worst than the old Minimum Sum scheme that works on a draw-down basis. The paltry interest rate from the bank is far lower than the old Minimum Sum scheme. And with no discipline, the S$77,500 will be spend sooner.

If you did not plan when you are Younger, you will probably have no plans at 55 years old?

It pains to imagine someone receiving a sum of money from CPF and being clueless about what he/she should do with it. The most important aspect at that age, I presume, is to have financial stability and independence. This means a regular monthly income (that does not deplete) which is more than the monthly spending.

The most-last-minute plan is probably...

Buying another annuity. So if that is the case, should people, with no clue, still pledge their property? 

Let us just look at NTUC Income's Guaranteed Life Annuity. The following is an extract illustration that is based on male aged 55 who invested S$100,000 on the Annuity plan with payout starting at age 65:

It seems that CPF Life is a better option without the Non-guaranteed portion (S$77,500 that pays out approximately S$600). The Non-guaranteed portion is always a projection. If fulfilled, the NTUC Income's Guaranteed Life Annuity might give you a better monthly annuity payout as you age. It is difficult to do a detailed comparison. It will be better to contact your Insurance Agent for more clarification and do your calculations from there. Any Private insurance company will be willing to explain their products that is similar to NTUC Income's.

Retirement should be something you can look forward to..

And financial stability is something you must have to maintain your retirement lifestyle. I have always emphasize to start your retirement planning early. A retirement plan that gives you a monthly income with no limits to the withdrawal period.

Start Young and do not be clueless at 55 years old...

If you have been actively building your retirement next, my best guess is that you will be happy to pledge half your property. 

Read:
1. CPF Explained
2. S$2000 (monthly), Enough for Basic Living?
3. PM Lee National Day Rally 2014 - Assurance in Retirement?

It came to my attention that the fictitious Mr Tan's - who was made famous in the 2014 National Day Rally - current monthly salary of S$4,500 would place him around the 25th to 30th percentile of Singapore household income ladder. According to the Department of Statistics, in 2013, the average monthly household income for the lowest 10 per cent of resident households was S$1,711.

The S$2,000 projected retirement income for Mr Tan, in today's dollar value, would therefore put him among the lowest 10 per cent of resident households which is considered to be enough for basic or subsistence living. And with inflation, the real value of the S$2,000 retirement income will be paltry.

So is S$2,000 (monthly) enough for basic living?

A S$4,500 to a S$2,000 lifestyle is a big adjustment. Are you willing to make such an adjustment? Even if you are, please do consider inflation. Are you willing to believe that the two pillars (CPF and Home Ownership) are enough? Think hard. The best lessons are to look for examples - your parents', your seniors' - and ask yourself could they have done more.

Read: National Day Rally 2014 - Assurance in Retirement?

PM Lee in the recent concluded National Day Rally spoke at length on a few key points - 1) Honoring our Pioneers (especially our first President Yusof Ishak), 2) Education (is not just the academic route), 3) A new Municipal Services Office (a single point-of-contact to sort out municipal issues), 4) Announced the Redevelopment of Jurong Lake District, and lastly 5) Assurance in Retirement (the most awaited topic).

PM Lee outlines CPF options for retirement

PM Lee explained the CPF minimum sum and other retirement related issues as a 'financial planner' in this year's National Day Rally (see attached YouTube video below).

The info-graphics (below) sum up the 4 key points:

1. CPF and home ownership go hand-in-hand in providing for your retirement.

2. The current Minimum Sum is not too much.

3. If you own a house, you only need to set aside half of the Minimum Sum - or S$77,500 - for those who turned 55 this July.

4. You have many options to get money from your house.

Key Changes that will aid your Retirement Plan

1. Silver Support Scheme. PM Lee announced a new scheme, called Silver Support, that will be setup to give lower-income Singaporeans with little or no CPF saving an annual bonus from the Government. More details will be announced at a later date.

2. Flexibility for Lump Sum Withdrawal. There will be more flexibility for CPF members, who are retired (65 and over), as they will be allowed to take part of their savings as a lump sum during retirement. However, it is subjected to limits. Again, details will be announced at a later date.

3. Leased Buyback Scheme extended to 4-room flats.  PM Lee also announced that Leased Buyback scheme will now allow 4-room flat owners to sell part of their 99-year lease to the Government in return for a regular income.

4. Minimum Sum will be raised to S$161,000 in 2015. PM Lee revealed that the Minimum Sum will be raised to S$161,000 for those turning 55 next July. He also said that he did not see a need for further major increases and stressed that the Minimum Sum will stay.

5. Government to set up an advisory panel to study the CPF changes, including how CPF savings can be invested more widely.

CPF and Home Ownership go hand-in-hand in providing for your Retirement - Enough?

The question is how much do you need when you retire? You have to decide.

Let us use PM Lee's example of Mr and Mrs Tan's retirement plan. 

We know that the Minimum Sum will stay. How much will it be in 20-30 years time? No one knows. How much will the payout be? Should be more than S$1,200 if we are able to have at least S$155,000 in our CPF Accounts. 

A hypothetical scenario: 

1) We are able to pledge the required Minimum Sum in our CPF retirement account without pledging our property. The Minimum Sum will be S$161,000 in year 2015. To simplify the scenario, the payout will be S$1,200.

2) We are also able to fully pay for our 4-room flat and was able to rent the whole flat out for S$2,500. There are many 'ifs' here - if we are able to rent it out for the long term, if we are able to stay with our children etc.

In this hypothetical scenario, we are actually in a better position. The monthly and regular income will be S$3,700. A decent amount for retirement.

As PM Lee said, if the Tan Family has both CPF and Home Ownership, they will be a happy couple. True to a certain extend. There are adjustments that you have to make, like renting out your home. What if we cannot monetized the flat? What if the regular payout from CPF Life is all we got - S$1,200 monthly? 

I believe...

Another poll on CPF. This time it was done by Manulife. 500 online interviews were conducted and I believe that all 500 interviewee were Investors.

Findings from the survey:

1. Only 21% of those polled were confident that their CPF savings would sufficiently fund their retirement.

2.  47% felt that their savings would not be enough.

3.  44% felt that the returns were too small.

4.  26% of investors made additional voluntary contributions to their CPF account.

5.  63% of CPF members called for greater flexibility in withdrawing funds.

6.  59% called for more education on retirement planning.

7.  56% wanted government or employer contributions to be raised.

8.  32% actively managed their CPF.

9.  45% of investors would prefer to take a lump sum after leaving the required minimum balance in the CPF Retirement Account once they reach 55.

10. Only 22% choose to buy an additional retirement or pension plan once they free up some of their CPF cash.

CPF 'Enough' or CPF 'Not Enough'?

The result from the poll is from an investor's perspective. There are no details on the level of expertise of these investors interviewed. Nevertheless, it is not surprising the interviewees wanted more flexibility in withdrawing their funds. Everyone wants flexibility.

This poll does not represent the larger population. But I strongly agree that more education on retirement planning is necessary. People must be more proactive, instead of waiting for information to be fed to them. If retirement planning has always been on your mind, what is stopping you from gaining more knowledge and taking the first step. Nothing.

I am not in the stage to know if our current generation (born in the 80s) will have enough savings in our CPF. But i do foresee that we will have a tough time. CPF, at least for me now, is for my mortgage payments. Mortgage payment stretches up to 25 years. If I started paying for my house at 30 years old, i will be 55 years old when i have fully paid for the house. You can only imagine how much savings will there be in the CPF Special Account because, for sure, you would not have much savings in the CPF Ordinary Account.

I will lean towards CPF is not enough to ensure that I will plan for another retirement account that is not restricted by anyone or institute. Planning for a backup. Why not?

Anyway, PM Lee Hsien Loong, in this year's National Day Message, mentioned that the CPF Scheme has been successful for many in ensuring a stable retirement but it can be improved. In the coming National Day Rally, we can expect some of the CPF issues and changes to be addressed. Stay tuned.

Read:

1.  CPF Explained

2.  "It's not too early to think about retiring" - The Sunday Times

3.  "Saving too little, too late for retirement" - The Straits Times

Andrew Hallam is the author of the book: Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned at School. He teaches Personal Finance at Singapore American School. And yes, he is really a millionaire teacher.

A Teacher? A Millionaire? A middle class salary? Able to grow his wealth? These are probably the questions you have in mind.

I got to know about Andrew Hallam recently when i watched an uploaded YouTube video of his interview that was first broadcast in Singapore on Channel NewsAsia's program, Money Mind. Watch the video below (both part 1 and 2).

After watching the video, i went down to the nearest bookstore to purchase his book. I wanted to find out more about the man and how he succeeded. A little more about Andrew. He did not grow up in a wealthy family. His father was a mechanic and his mother worked part-time at a retail store. He had to basically work for what he wanted, even in his teens. At 20, he was working through summer washing buses at a bus depot to pay for his college tuition. It was there when he met an insightful mechanic who happened to be a millionaire.

To cut the story short and putting some spoiler alert in place, Andrew learnt that it was not always necessary to have a high paying job, in order to build wealth.

Of course, the rest is history.

A Teacher, can do it. A Mechanic, can do it. I will do it. You can too.

Many times, we just do not believe that is possible to grow our wealth when our monthly expenses are high. It is always easy to say: "I can only save if I earn more." The truth is that adopting responsible spending is difficult. You can be earning S$10,000 a month but not saving at all. Familiar? Somehow our expenses always catch up with whatever increment (from our jobs) we get. Differentiating the wants and the needs is difficult. I believe the journey taken by Andrew or the mechanic was challenging, yet achievable.

Forced monthly savings has been a habit for me. This allows me to spend only after I have saved. As the saying goes: "It is not how much you earn, but how much you save (then invest)!" Easy? No! Possible? Definitely!

Andrew Hallam is an inspiration. I hope you will be inspired to be more proactive in planning to be financially free.

Bank interest rates have been so low for so long that it does not really matter anymore. In recent years, banks have promoting higher interest rates on your deposits (of course, with an * asterisk). 

In one of my entries, I have highlighted that i have a sum of money that I will only use if there is a big stock market correction. And since the money is in the bank, i will definitely make sure it works for me, in terms of earning interest.

This is not an advertorial entry. I am personally using the products - mentioned below - to at least get some decent interest.

Wake up your money with up to 3.05% p.a.  - OCBC  

OCBC 360 deposit account has a base interest of 0.05% p.a. for account balances up to S$200,000 or 0.15% p.a. for balances above S$200,000. However, you can earn bonus interest on the first S$50,000 of your account balance.  

The bonus interest is only credited if the following actions are taken:

1. Earn extra 1% p.a. - Credit your salary every month to own OCBC 360 deposit account.

2. Earn extra 1% p.a. - Pay any 3 bills online or with GIRO from your own OCBC 360 deposit account. Phone bills, other credit cards' bills etc.

3. Earn extra 1% p.a. - Spend a total of at least S$400 on an OCBC credit card monthly.

As they always say, there is no free lunch. Crediting your salary and paying the bills through OCBC online banking system is an easy way to earn the extra 2% interest. As for the additional 1%, if you are already spending S$400 monthly on another credit card, you could easier do the switch.

If we earn the full 3.05% interest p.a., that will work out to be S$1525 annually. 

Bonus$aver - Standard Chartered

Another product that has been in the market for a longer period is Standard Chartered Bonus$aver. The base interest is at 0.10% p.a. for account balances up to S$200,000 or 0.20% p.a. for balances above S$200,000. And if you spend S$500 on your Standard Chartered credit card each month, you will earn additional 1.88% p.a. on your savings up to S$25,000 balance. 

Just one clause, and no free lunch.

Again, if you earn the full 1.98% interest p.a., it will work out to be S$495 annually.

I remembered reading Adam Khoo's book - Secrets of Self Made Millionaires - and, in his book, he classified four levels of wealth. Prior to that, wealth was just wealth, and i did not differentiate the wealth that i would like to attain. 

In summary, the four levels of wealth are:

Level 1: Financial Stability. You have achieved Financial Stability when you have accumulated enough liquid assets (i.e. disposable cash) to cover your current expenses for a minimum of six months.

Level 2: Financial Security. You have achieved Financial Security when you have accumulated an amount of investment that generates enough passive income to cover your most basic expenses.

Level 3: Financial Freedom. The difference between Financial Freedom and Security is that the accumulated investment generates enough passive income to sustain your current lifestyle.

Level 4: Financial Abundance. The ultimate level that allows you to sustain your desired lifestyle.

I highly recommend people to read the book. The book is more than the four levels of wealth. I am working towards Financial Security and one day hope to achieve Financial Freedom. 

I have set my goals. What about you?

This is a good piece of news. Starting in January 2015,  the Singapore Exchange will reduce the board lot size for listed stocks from the current 1,000 shares to 100.

What does that mean to a retail investor like me? 

Purchasing of blue-chip stocks like DBS Bank will now be more affordable and it allows me to slowly build a good blue-chip stock portfolio. For example, if I intended to buy DBS Bank shares at S$18.31 (current price as of Aug 1) a piece, I will now only need S$1,831 to acquire one lot, compared to $18,310.

Certain blue-chip stocks were out of my reach prior to this announcement. From next year, I will start to pay attention to the more expensive stock counters. Some of these blue-chip stocks provide good capital gains and dividends. 

I hope there will be more retail investors building up their retirement portfolio.